2009 (8) TMI 220 - HC - Income Tax

Disallowance of expenditure in relation to income which does not form part of total income - The assessee is engaged in manufacture and sale of cotton yarn. Assessee made investment in shares using its own funds - During assessment the Assessing Officer applied section 14A and disallowed interest on the amount of investment in shares on the ground that since dividend income is exempt from tax - Admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application. - No substantial question of law arises. - The revenue s appeal is dismissed.

Summary

Issues:
1. Interpretation of section 14A of the Income-tax Act, 1961 regarding disallowance of interest on investment in shares.
2. Applicability of the judgment in CIT v. Abhishek Industries Ltd. to the current case.
3. Determination of whether section 14A applies when the assessee has not made any claim for exemption.

Issue 1: Interpretation of Section 14A of the Income-tax Act:
The High Court addressed the issue of disallowance of interest on investment in shares under section 14A of the Income-tax Act, 1961. The Assessing Officer had disallowed interest on the amount of investment in shares, arguing that since dividend income is exempt from tax, section 14A applied. However, the Commissioner of Income-tax (Appeals) reversed this view, stating that section 14A could not apply when the assessee had not made any claim for exemption. The Tribunal affirmed this finding, emphasizing that if the assessee had invested its own funds in purchasing shares, there should be no disallowance under section 14A. The Tribunal held that no disallowance was warranted under section 14A since the assessee had not incurred any expenditure for making the investment in shares.

Issue 2: Applicability of CIT v. Abhishek Industries Ltd. Judgment:
The Revenue contended that disallowance under section 14A was justified, citing the judgment in CIT v. Abhishek Industries Ltd. The High Court clarified that the Abhishek Industries Ltd. judgment was specific to the allowability of interest paid on loans given to sister concerns without interest. The court highlighted that in the present case, the assessee did not make any claim for exemption, rendering section 14A inapplicable. The court emphasized that the observations in the Abhishek Industries Ltd. judgment must be understood in the context they were made and were not directly applicable to the current scenario.

Issue 3: Application of Section 14A Without Claim for Exemption:
The key issue revolved around whether section 14A could apply when the assessee had not made any claim for exemption. The High Court concluded that in the absence of a claim for exemption, section 14A had no application. The court dismissed the Revenue's submission that disallowance under section 14A was justified, reiterating that the assessee not making a claim for exemption precluded the application of section 14A. Consequently, the court found no merit in the Revenue's argument and dismissed the appeal, stating that no substantial question of law arose in this context.

In summary, the High Court's judgment clarified the interpretation of section 14A of the Income-tax Act, emphasizing that the provision does not apply when the assessee has not made any claim for exemption. The court distinguished the applicability of the CIT v. Abhishek Industries Ltd. judgment and held that in the absence of a claim for exemption, disallowance under section 14A was not warranted.